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The appraisal process is to provide a plain, speedy, inexpensive and just determination to an insurance dispute. However, as many first party property lawyers and homeowners have experienced, appraisal is not necessarily speedy, inexpensive or just. In fact, many times the insurer will refuse to participate in the appraisal process requiring the insured to bring a lawsuit to force the insured to participate.

Such a situation arose in the case of McCoy v. American Family Mutual Insurance Company.1 The McCoy’s sustained storm damage to their home and notified American Family accordingly. After conducting an inspection, American Family advised the insured of the estimated amount of the loss. The insured disagreed with American Family’s estimate and provided the insurer with its own estimate which identified additional damages. Following a second inspection, the insured and insurer continued to disagree on the amount of the loss and American Family directed the insured to the appraisal provision within the policy.

The insureds withdrew their first appraiser on the basis that the individual selected did not handle appraisals. Following the selection of their second appraiser, the insureds withdrew their demand for appraisal advising American Family that they did not understand the appraisal process and were unable to obtain information on the appraisal process from American Family Agents.

American Family advised the insureds that it would not change its prior determination as to the amount of the loss, claiming the delays in naming an appraiser and on-going repairs/additions to the insured premises hindered the insurer’s ability to obtain an independent estimate of the actual damage. As such, American Family stated that appraisal was “no longer available”.2

Following a renewed demand for appraisal which was refused by American Family, the insureds filed suit, seeking an order compelling American Family to comply with the policy’s appraisal provision. American Family asserted, in part, that it did not need to comply with the policy’s appraisal provision because the conditions of the insured property were substantially altered without notice to American Family.

After concluding that the policy’s appraisal provision had been triggered, the District Court of Minnesota found that American Family was unable to identify any legal basis that would excuse it from performance and granted the insureds’ motion to compel appraisal. In relevant part, the Court concluded that American Family had been shown the damage twice before the insureds began construction allowing American Family to make a determination as to the amount of loss at that time. Moreover, American Family was unable to substantiate its claims of impossibility of performance given the fact that its appraiser had not even looked at the insured premises since the additions. Submitting a claim to an appraisal is not inappropriate merely because performing the appraisal might be difficult.3

During an insurance claim, insureds are sometimes given incorrect information by the insurance company and its agents. Among other things, these misstatements may relate to the terms and requirements of the policy, the safety of the premises, or how repairs must be handled. False statements made in relation to an insurance claim can give rise to a negligent misrepresentation claim. This can be a useful tool in litigation against insurance companies in some circumstances.

Although there are “various tort theories” an insurance company can be sued for, it is well known that bad faith is the “most prominent” tort claim that can be asserted. Bock v. Hansen (2014) 225 Cal.App.4th 215, 228.) Generally, an insured cannot sue his or her insurance company for negligence. (Sanchez v. Lindsay Morden Claims Services, Inc. (1999) 72 Cal.App.4th 249, 254.) However, negligent misrepresentation is a “different tort” than negligence. (Bock, supra, 225 Cal.App.4th at 227.) Indeed, negligent misrepresentation is “a species of the tort of deceit.” (Id. at 228.)

Under California law, under the right circumstances, a cause of action for negligent misrepresentation can be brought against an insurer. Pleading such a claim in litigation against an insurance company can have advantages.

First, negligent misrepresentation claims provide a potentially broader avenue to pursue personal injury claims than a bad faith claim. This is because negligent misrepresentation prohibits “providing false information [which] poses a risk of and results in physical harm.” (Id. at 229.) In one California case, a negligent misrepresentation claim was allowed for personal injuries to an insured who was told by the insurance company adjuster that they were obligated to clean up a tree limb. (Id. at 303-304.) In a bad faith claim, however, certain California case law has indicated that an “economic loss” may be required to recover. (See Richards v. Sequoia Ins. Co. (2011) 195 Cal.App.4th 431, 438.) When personal injuries are involved, a negligent misrepresentation claim may be the most viable claim against an insurance company.

Second, a negligent misrepresentation claim allows for liability against the insurance agent or adjuster that made the misrepresentation. California case law has held that a “cause of action for negligent misrepresentation can lie against an insurance adjuster.” (Id. at 231.)

Finally, a misrepresentation by an insurance company relied on by the insured often trumps unknown terms of the policy contrary to the misrepresentation. Insurance company’s often assert the policyholder’s “duty to read” the policy when relying on terms that the insured did not know about. California Courts, however, recognize that “a very small percentage of policy-holders” actually know the terms of their insurance policy. (Eddy v. Sharp (1988) 199 Cal.App.3d 859, 864.) A negligent misrepresentation lies despite unknown policy terms to the contrary because “an insured should be able to rely on an agent’s representations of coverage without . . . examining the relevant policy provisions.” (Bock, supra, 225 Cal.App.4th at 232.)

A negligent misrepresentation claim is not often asserted in bad faith litigation against insurers. It does, however, offer certain advantages. Policyholders who have relied on false information by their insurance company, and were harmed because of it, should consider such a claim.

Consider this scenario taken from an actual project dispute: The contractor has entered into an agreement with the owner for a project of any size. During the course of the project, the owner directs the contractor to perform additional work under a written “field change directive,” pending execution of a formal change order.1 The written field change directive sets forth the scope of the additional work to be performed by the contractor and states that payment will be calculated on a time and materials basis. The original contract documents contain a schedule assigning unit price values to particular categories of labor and materials. The contract also states, however, that the stipulated contract price shall not be amended until there is a fully executed change order.

Prior to the written field change directive being embodied into a final, formal change order, the owner becomes insolvent and does not have the funding to pay for work already completed. The contractor, now being owed some or all of the original contract price plus payment for work performed under the field change directive, wants to file a lien under the construction lien law of the state where the project is located (the Lien Law). Because construction lien laws in some states provide that a lien can only be filed for the unpaid portion of the stipulated contract price or amended contract price, however, a very legitimate question arises: Is the unpaid portion of the work performed under the written field change directive “lien-able” under the Lien Law?

Owners might answer this question in the negative. They would argue that, until the work performed under the field change directive is finalized and perfected into a final change order pursuant to the terms of the contract, there is no amended contract price and the work cannot form the basis for a lien. Contractors, on the other hand, would answer the question in the affirmative, arguing that the written field change directive constitutes a written amendment to the contract price and therefore will support a lien. To resolve the obvious disagreement and differing of interests of the owner, contractor and, in most cases, subcontractors, one needs to the turn to the express language of the applicable Lien Law and the policy behind it.

New Jersey’s Construction Lien Law, for example, is typical in limiting lien claims to the unpaid portion of the contract price or amended contract price. The law permits contractors or subcontractors to lien property for the value of the work or services performed “in accordance with [a] contract and based upon the contract price.” The law defines “contract” as “any agreement, or amendment thereto, in writing, signed by the party against whom the lien claim is asserted and evidencing the respective responsibilities of the contracting parties[.]” Therefore, in order to support a lien, a lien claimant must demonstrate that there is a contract or amendment thereto that (i) is in writing, (ii) sets forth the parties’ respective obligations and (iii) evidences a contract or adjusted contract price.

Thus, to the extent that the field change directive is in writing and sets forth (i) the parties’ obligations (e.g., scope of work to be performed) and (ii) the manner by which the extra work will be priced, the argument may be made that the additional work should be lien-able. Provided that these elements are present, the contractor would argue that it should be entitled to assert a lien related to the unpaid portion of the written field directive in accordance with the typical Lien Law.

The policies behind the typical Lien Law, it could be argued, also support the conclusion that written field directives are lien-able. The purpose of the “written contract” requirement of the New Jersey Construction Lien Law, for example, is to “provide ‘tangible evidence that will reduce the factual proof problems in litigated matters and provide a sound basis for third parties to evaluate the merits of the lien claim.’”2 That legislative purpose of the “written contract” requirement, the contractor could assert, is fully satisfied by field change directives that are in writing and set forth the respective responsibilities of the parties and the applicable pricing terms for the extra work.

Additionally, the contractor could argue that the “written contract” requirement should also be construed in a manner consistent with the broader underlying policies of the typical Lien Law. The New Jersey Lien Law, like many others, was primarily enacted to “guarantee effective security to those who furnish labor or materials to enhance the value of the property of others [.]”3 The statute is to be read “sensibly” and “with an understanding of the policies underlying the Lien Law.”4 Accordingly, so long as the written field change directive and the associated contract price change are readily quantifiable and verifiable, the field change directive is enforceable, the contractor would maintain, because it satisfies both the letter and the spirit of the common Lien Law’s “written contract” requirement.

There is another policy consideration to be explored. If field change directives are not lien-able until they are processed into “final” change orders, the ability of construction projects to continue without interruption and delay would be severely impeded. Field change directives are not only customary in the industry, but are also integral to the industry’s ability to ensure that projects do not come to a halt every time a change is encountered or extra work is assigned, until a final change order can be issued. Owners need the ability to direct the performance of extra work while the total cost of that work is still being quantified, and contractors who dutifully perform that work on a lump sum or time and materials basis pending issuance of a formal change order need to know that their work is protected by the Lien Law. The vital role of the field change directive or “construction change directive” is well-established in the construction industry and “common practice … to get the work rolling when the owner, contractor and architect are unable to agree on the price or time adjustments for the change.”5 Consequently, contractors engaging in the customary industry practices of performing additional work pursuant to a field change directive should most certainly be afforded a Lien Law’s protections. The use of field change directives would be severely chilled, and the progress of construction projects throughout the industry would be obstructed, if the courts were to adopt a rule that extra work performed on a time and materials basis pursuant to a field change directive cannot be liened, no matter how well documented, if the party who issued the field change directive goes defunct while that work is midstream and issuance of a final change order is still pending.

These arguments would weigh in favor of the contractor’s position that written field change directives are lien-able. Accordingly, and absent other countervailing circumstances, a contractor could credibly argue that it should not be considered a violation of a Lien Law for the contractor to file a construction lien that includes unpaid amounts billed pursuant to a written field change directive that sets forth a method for calculating the changed price.

By far, the most recent, significant arbitration development for construction law practitioners was the Texas Supreme Court’s decision in G. T.Leach Builders v. Sapphire V.P., which reiterated the limits on compelling arbitration by non-signatories, and clarified what litigation conduct can trigger waiver of the right to compel arbitration.

Background of the Dispute

A luxury condominium project being constructed by a developer was damaged by a hurricane midway through construction. The conduct of work on the project was covered under AIA Doc. Nos. A-111 and A-201.

After attempting unsuccessfully to obtain insurance proceeds to cover its losses, the developer sued its insurance brokers, claiming that they allowed a builders’ risk insurance policy to lapse prior to the hurricane. Later, the insurance brokers designated as responsible third-parties, the general contractor, two subcontractors, an engineering contractor, and one of its principals. The developer then amended its pending claims to add as defendants all of those designated by the insurance brokers as responsible third-parties.

Claims of the Parties

Thus, there were pending disputes between the developer and the general contractor, as well as between the developer and several subcontractors. The subcontractors claimed that the developer had agreed to arbitrate its claims against them, as well as its claims against the general contractor.

The agreement between the developer and the general contractor contained an arbitration clause. The general contractor moved to compel arbitration pursuant to the terms of that agreement, but only after submitting to the court, where the lawsuit was pending, pretrial motions for a continuance and partial relief, and participating in discovery for six months. The other defendants (the insurance brokers and subcontractors) moved to compel arbitration on the basis of the same arbitration clause (to which they were not signatories), and on the basis of the terms of the subcontractor agreements with the general contractor (which the developer never signed).

The lower courts denied all motions to compel arbitration.

Conclusion

Recent cases have revealed the following developments in the arbitration of construction-related disputes: the extent to which non-signatories can compel arbitration; the waiver of the right to compel arbitration; the procedures and the timetable to be followed in adjudicating arbitrability; the extent to which an arbitration process can resolve the disposition of interplead funds; the impact of a prior award on a present dispute; and the limits of post-proceeding review of an arbitration award.

It is anticipated that courts will continue to grapple with the challenges presented by non-signatories seeking to compel arbitration by claims of waiver, attacks on the involvement of the neutral in the process, and the limits of post-proceeding review of an award, particularly a trial court’s ability to interject additional relief into a judgment or otherwise attempt to revise the outcome of an award.

On June 17, 2016, the Texas Supreme Court held that a general contractor was not a “seller” under Chapter 82 of the Civil Practice and Remedies Code and, therefore, not entitled to indemnification from the manufacturer of an allegedly defective roof truss. See Centerpoint Builders GP v. Trussway Ltd., 2016 WL 3413329 (Tex. June 17, 2016). The general contractor, according to the Court, was not a “seller” because it was not “engaged in the business of” selling the roof trusses. Rather, providing the trusses was merely incidental to the general contractor’s construction services. The Centerpoint decision does not represent the expansion of liability for general contractors and manufacturers that could have occurred if the Court had ruled differently. See “Looming Texas Supreme Court Decision Could Impact Contractor Liability in Construction Cases.” Nevertheless, the Court emphasized that the “seller” analysis is fact-specific and that a general contractor could be considered a “seller” under different circumstances.

Chapter 82

Chapter 82 provides a means for an “innocent” seller to seek indemnification from the manufacturer of an allegedly defective product. See Tex. Civ. Prac. & Rem. Code § 82.002. The statute requires a manufacturer to indemnify and hold harmless a seller against loss arising out of a product liability action, except for any loss caused by the seller’s negligence, intentional misconduct, or other act or omission for which the seller is independently liable. Id. at § 82.002(a). “Seller” is broadly defined in the statute as “a person who is engaged in the business of distributing or otherwise placing, for any commercial purpose, in the stream of commerce for use or consumption a product or any component part thereof.” Id. at § 82.001(3).

Notably, the Texas Supreme Court in Fresh Coat, Inc. v. K-2, Inc., 318 S.W.3d 893 (Tex. 2010) held that a contractor hired to apply synthetic stucco components to homes according to the manufacturer’s instructions and training is a “seller” of the synthetic stucco components. The Court in Fresh Coat held that Chapter 82’s definition of “seller” does not exclude a seller who is also a service provider, and Chapter 82 does not require the seller to sell only the product at issue. Id. at 899.

Case Background and the Beaumont Court of Appeals Decision

Centerpoint began as a personal injury action filed by Merced Fernandez against Centerpoint Builders GP, LLC (“Centerpoint”) and Trussway Ltd. (“Trussway”) for injuries sustained while installing drywall at an apartment complex construction project. Centerpoint was the general contractor, and Fernandez was an independent contractor. At the time of the accident, Fernandez was standing on a roof truss that had not yet been installed. The truss broke and Fernandez was severely injured from his fall. Fernandez filed suit, asserting that the truss, which was manufactured by Trussway and purchased by Centerpoint, was defective and unreasonably dangerous.

Centerpoint filed a claim against Trussway seeking statutory indemnification under Chapter 82. Trussway filed a cross-action against Centerpoint, denying that Centerpoint was a seller under Chapter 82 and contending that it was actually an innocent seller that was entitled to indemnification from Centerpoint. The trial court granted Centerpoint’s motion for summary judgment and held that Centerpoint was a “seller” under Chapter 82 but denied Centerpoint’s motion for partial summary judgment regarding its entitlement to indemnity. The trial court also held that Trussway was not entitled to indemnity from Centerpoint. The parties then filed a joint notice of agreed interlocutory appeal.

On appeal, the Beaumont Court of Appeals reversed the trial court’s order and held that Centerpoint does not fit the statutory definition of “seller,” focusing on how the Fresh Coat opinion was distinguishable from the facts before it. Centerpoint Builders GP, LLC v. Trussway, Ltd., 436 S.W.3d 882 (Tex. App.—Beaumont, pet. granted).

The Texas Supreme Court’s Decision

The Texas Supreme Court framed the inquiry as whether Centerpoint was “engaged in the business of” selling trusses. If so, then it was a “seller” under Chapter 82 entitled to indemnification.

The Court began its analysis by distinguishing Fresh Coat, which it described as being limited to the proposition that one is not precluded from being a seller merely because one also provides services. See Centerpoint, 2016 WL 3413329 at *4. The Court also noted that the contractor in Fresh Coat sold and installed a particular product, as evidenced by testimony that the contractor was in the business of providing the product combined with the service of installing the product. Id.

The Court then turned to case law from both Texas and other jurisdictions, which, although sparse, supported the conclusion that Centerpoint is not a seller. Id. at *6. The Court examined cases—typically in the strict liability context—holding that contractors whose business is providing construction services, as opposed to any particular building material utilized in the construction process, were not sellers of the material. These cases emphasized the distinction between a company in the business of selling its services and a company in the business of selling products. Distilling these cases, the Court held that one is not “engaged in the business of” selling a product if providing that product is incidental to selling services. Id.

Applying this standard, the Court held that Centerpoint was not a seller, even though it technically sold trusses to its customer. Id. In particular, the Court examined the specific project at issue, noting that Centerpoint agreed to undertake construction of an entire building and to be reimbursed for the cost of the materials—including the trusses at issue. Id. This, according to the Court, indicated that Centerpoint was in the business of selling construction services as opposed to trusses or other building materials. Id.

Practical Implications

The Court in Centerpoint declined to expand Chapter 82’s applicability to construction cases and provided some much-needed clarity regarding the parameters of the statute’s definition of “seller.” However, contractors and those in the manufacturing chain should note that the Centerpoint decision left open the possibility of the “seller” designation being applied to contractors in certain situations.

In particular, the Court implied that a general contractor who is also a “retailer” or a “wholesale distributor” of a particular product might be a “seller” under Chapter 82. The Court also placed particular emphasis on how Centerpoint charged its customer for the building materials. The Court noted that Centerpoint did not set prices on the materials to achieve a gain or profit but was effectively reimbursed for the cost of the materials. If building materials were priced to achieve a profit in a particular contract, this fact could weigh in favor of Chapter 82’s application.

Given the Court’s admonishment that the Chapter 82 “seller” analysis is highly fact-specific—and its acknowledgment that “some contractors may engage in the business of selling both products and services”—this will likely continue to be a heavily contested issue in the construction context. Thus, general contractors and product manufacturers will need to determine how best to allocate the uncertainty of such a statutory indemnification claim. See Centerpoint, 2016 WL 3413329 at *7.

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